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Understanding the Behaviour of Stock Market

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Capital Markets and Investment Decision Making

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Abstract

Sharp fall and sharp rise are the innate behaviour of stock market. It is also attributed to the psychological phenomena which affects financial decision-making capabilities of investors. Investors inherently act in an irrational manner that does influence asset prices. Understanding the behaviour of investors can help, therefore, in making strategies which could be used in fetching abnormal returns by exploring systematic errors made by investors while making investment decisions .

The key to making money in stocks is not to get scared out of them.

Peter Lynch

Raj S. Dhankar & Devesh Shankar, ‘Understanding the Behavior of Stock Market Functionality: Need and Role of Behavioral Finance’, Review of Management, Vol. 5 no. 3/4, December 2015.

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Authors and Affiliations

  1. Faculty of Management Studies (FMS), University of Delhi, New Delhi, India

    Raj S. Dhankar & Devesh Kumar

Authors
  1. Raj S. Dhankar
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  2. Devesh Kumar
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Correspondence to Raj S. Dhankar .

Annexure: Market Anomalies

Annexure: Market Anomalies

Article

Anomaly

Description

Rozeff and Kinney (1976)

January effect

Seasonality in monthly stock returns on NYSE over a period of seven decades with large returns in the month of January

Basu (1977)

Value effect

Returns of stocks with low P/E ratio tend to be higher than returns of stocks with high P/E ratio

French (1980)

Weekend effect (also known as ‘day-of-the-week effect’)

Stock returns on Monday are lower than other trading days

Banz (1981)

Size effect

Smaller firms (firms with small market capitalization) tend to provide higher risk-adjusted returns than larger firms

Harris and Gurel (1986)

Index inclusion effect

Stocks that were included in the S&P500 index exhibited significant price increase on the day of inclusion

De Bondt and Thaler (1985, 1987)

Overreaction effect (also known as ‘reversal effect’)

Stocks that garner long-term losses (gains) over an initial period (3–5 years) tend to undergo reversals by amassing gains (losses) over the subsequent period

Jegadeesh and Titman (1993)

Under-reaction effect

Stocks that garner short-term gains (losses) over an initial period (up to 12 months) tend to exhibit return persistence by amassing gains (losses) over the subsequent period

Saunders (1993)

Weather effect

Local weather exhibited a systematic influence on the stock prices of New York City exchanges

Ikenberry et al. (1995)

Share repurchase anomaly (also known as buyback anomaly)

Open market share repurchase announcements are followed by significant abnormal returns in the long run (more than 3 years)

Loughran and Ritter (1995)

Net stock issue anomaly

Firms that issue stocks, either through initial public offering or follow-on public offering, tend to perform poorly over the long run (up to 5 years from date of issue)

Haugen and Baker (1996)

Profitability anomaly

Firms with higher profitability tend to have higher expected returns

Sloan (1996)

Accrual anomaly

There is a negative relationship between accrual (non-cash) component of earnings and future stock returns; i.e. firms that have high (low) levels of accruals tend to provide negative (positive) future abnormal stock returns

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Dhankar, R.S., Kumar, D. (2019). Understanding the Behaviour of Stock Market. In: Capital Markets and Investment Decision Making. Springer, New Delhi. https://doi.org/10.1007/978-81-322-3748-8_1

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